Wednesday, May 4, 2016

WFM Analysis

Update 6/6/2016: WFM moved sharply upward immediately after earnings were announced, paused sufficiently to feed expectations of a partial pullback, and then dashed those expectatoins as it shot up again, I exited today as the odds of the the position expiring profitably reached zero.

It was a bear position, in line with analyst expectations. They were wrong, and therefore I was  on the wrong side of the market.

My odds of a profitable trade were 59.1% at entry -- that's 2 chances out of 5 of a loss, and that's dice rolled.

Shares rose by 23.2% over 33 days, or a +256% annual rate. The options position produced a 64.6% loss on debit for a -714% annual rate.

The organic foods grocery chain Whole Foods Market Inc. (WFM), headquartered in Austin, Texas, publishes earnings on Wednesday after the closing bell.

[WFM in Wikipedia]


I shall use the JUN series of options, which trades for the last time 44 days hence, on June 18.


Implied volatility stands at 46%, which is 2.9 times the VIX, a measure of volatility of the S&P 500 index. WFM’s volatility stands in the 61st percentile of its most recent range. The price used for analysis was $28.52.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

The Third Wave: An Entrepreneur’s Vision of the Future
by Steve Case

The Trade

WFM hit an all-time high in October 2013. It has been mainly downhill since, interrupted only by a sharp retracement to the upside from September 2014 to February 2015. Most recently the declined has slowed, falling into a sideways pattern beginning in August 2015. Although the movement have had stable highs, each of the second of the two lows was lower than the first. Still a decline.

WFM has closed higher on the first trading day following an earnings announcement only once out of the last four occasions.

Brokerages in aggregate give WFM an enthusiasm index of negative 68% -- that's so low it should be called a loathing index -- with only 14% of 22 analysts issuing strong buy recommendations.

It's a bearish picture throughout. Also, I see no expectations of an earnings surprise in the data available to me.

I shall use a bear call spread to structure the trade.

Bear call spread, short the $29 calls and long the $30 calls,
sold for a credit and expiring June 19.
Probability of expiring out-of-the-money

The premium is $0.39, which is 39% of the width of the position’s wings. The stock at entry was priced at $28.50.

The risk/reward ratio is 1.6:1.

The zone of profit in the proposed trade provides a 50-cent margin of profit above the entry price and profit all the way tot he downside. The biggest immediate move after each of the past four earnings announcements was $4.74, and the average was $2.53. After eliminating the maximum and minimum post-earnings movements, the core tendency is $2.65.

Decision for My Account

I entered a position on WFM has described above.

-- Tim Bovee, Portland, Oregon, May 4, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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